FOCUS: Covid-19 throws global ferrous correlations into disarray

The impact of Covid-19 is undeniably huge. It continues to make its presence felt across all commodity markets, including the ferrous supply chain, from raw materials down to finished steel products.

One significant impact that can be tracked closely through spot pricing is the increasing disarray in price correlations between various segments of the ferrous supply chain after the Covid-19 pandemic kicked in.

A supply chain typically moves together in the same price cycle, allowing for time lags between raw materials input and finished product output amid fluid market conditions. The recycling of steel products back into the supply chain is another factor to consider in a price cycle.

This is especially so in the seaborne commodity markets, which is exposed to differing levels of demand and supply in various regions, compared to domestic markets that are more stable in terms of trade flows.

Fastmarkets takes a look at the following key benchmark prices in Asia to decipher Covid-19’s impact on the regional steel market.

Looking back at 2019
An analysis of these prices concluded that the strongest correlations in 2019 between prices for raw materials and those for finished steel for mills in Asia that operate blast furnaces were between coking coal and hot-rolled coil (0.85) ad rebar (0.84).

Iron ore had a weaker correlation with finished steel, at 0.25 for HRC and 0.37 for rebar las year.

This is not surprising, given the supply shocks in the seaborne iron ore market after the collapse of one of Vale’s tailings dams in January and amid a flurry of other supply disruptions experienced by iron ore producers such as BHP.

In the electric-arc furnace segment, prices for scrap also showed a strong correlation with those for finished steel products - HRC at 0.89; and rebar, at 0.81.

Prices for finished steel products were good indicators for each other, with HRC and rebar tracking each other extremely closely, at 0.95.

Based on these, prices for coking coal and scrap were good indicators of steel prices in 2019. HRC and rebar were almost perfect substitutes for each other in terms of price trends.

The low correlation between iron ore and steel were due to prices for the steelmaking raw material moving in the opposite direction of those for finished products during some parts of the year.

Fast forward to Q1 2020
Looking at the same price matrix in the first quarter of 2020, the correlations seen in 2019 have either weakened or reversed.

In the blast furnace segment, prices for coking coal are now moving in the opposite direction of those for steel - at -0.44 for HRC and -0.56 for rebar. Coking coal’s price correlation with iron more is also at -0.10.

Covid-19 has arguably had the biggest effect on fob Australia prices for coking coal, with steelmakers around the world procuring less of the steelmaking raw material in light of worsening downstream demand for steel. This is due to many countries coming under some form of a lockdown to contain the spread of the virus.

Iron ore’s correlation with finished steel improved to 0.54 for HRC and 0.45 for rebar, although the sudden plunge experienced by steel prices in the first quarter have also outstripped iron ore price increases.

Along the EAF route, scrap’s price correlation with HRC has held up, at 0.84.

But its price correlation with rebar has deteriorated to 0.62.

This is not surprising, given how rebar futures had supported physical prices in China while the scrap market was battered by tumbling global demand.

Meanwhile, the correlation between HRC and rebar has reduced further to 0.77.

This is largely due to rebar prices increasing strongly on the back of a bullish futures market and higher demand associated with a restart of China’s massive construction industry.

Domestic rebar prices are now higher than those for HRC in China.

While these changes are interesting to see, for scrap, the lack of any suggests it remains a good indicator for steel price trends.

One could look at scrap prices in times of high volatility to get a better handle on steel prices.

Incidentally, Fastmarkets launched several new scrap prices earlier this year to complement the existing assessments for Taiwan, Vietnam and China.

The expanded coverage now comprises Japan, Bangladesh and South Korea as well.

While the worst appears to be over for some countries such as Italy, where some semblance of normalcy has returned in terms of production, others such as India remain locked down.

There are doubts in the market about how high steel prices might go, particularly with the International Monetary Fund (IMF) revising its forecast for economic growth downward for countries across the world.

A V-shaped recovery by China will likely support steel prices, and by extension, those for steelmaking raw materials as well. But if other economies contract significantly, we will probably see another change in the price correlation between steel and steelmaking raw materials.

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